India: Construction & Engineering Law

Last Updated: 5 September 2017
Article by Sumeet Kachwaha and Dharmendra Rautray

1 Making Construction Projects

1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which place both design and construction obligations upon contractors? If so, please describe the types of contract. Please also describe any forms of design-only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to "construction contracts" as an abbreviation for construction and engineering contracts.)

The construction industry in India does not subscribe to any standard form of construction contract, however, some of the commonly used forms include the suite of contracts published by FIDIC (International Federation of Consulting Engineers), ICE (Institution of Civil Engineers) and the model published by the IIA (Indian Institute of Architects). Governmental construction authorities, such as the National Highways Authority of India ("NHAI"), employ their own standard form contract as per their departmental requirements, particularly for Public and Private Partnership projects. One standard FIDIC form extensively used in the Indian construction industry is the Plant and Design/Build Contract. Design-only contracts prevalent in India are majorly inspired by the FIDIC Conditions of Contract for Plant and Design/ Build (the FIDIC Yellow Book).

Besides the NHAI, several government departments such as the Public Works Department, Delhi Metro Rail Corporation, Indian Oil Corporation, National Building Construction Corporation, Central Public Works Department, etc. have their own standard form contracts.

Management contracts are executed in the form of Engineering, Procurement and Construction Management Contracts. As the name suggests, such contracts are executed between employers and contractors, wherein contractors are hired to holistically manage the completion of a construction project while overseeing developments regarding engineering, procurement and construction of a project.

1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

The Indian law of contracts is codified (Indian Contract Act, 1872 – the "Act"). It is largely based on English Common Law. For any binding contract to come into existence, there should be an agreement between two or more parties who are competent to contract, and the parties must have entered into the agreement with their free consent, for a lawful consideration and a lawful object. These requirements are mandated by the Act (Section 10 thereof). As all other contracts, construction contracts must also satisfy the aforesaid requirements to be legally enforceable. Further, rudimentary requirements of a valid offer, followed by an acceptance of an offer, with the intention of entering into a legally enforceable agreement not void in law, are other essentials of a valid contract under the Act. As the Act provides, contracts need not be evidenced in writing, which similarly applies to all construction contracts.

1.3 In your jurisdiction please identify whether there is a concept of what is known as a "letter of intent", in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.

The legal position in India as regards a "Letter of Intent" ("LOI") is well settled and can be understood while referring to the contract law principle to the effect that an agreement to enter into an agreement does not create any legal relation between the addressor and its addressee, nor is it legally enforceable before a court of law.

A letter of intent merely indicates a party's intention to enter into a contract with the other party in future. Normally, it is an agreement to 'enter into an agreement' which is neither enforceable nor does it confer any rights upon the parties. However, some aspects of a LOI may contain binding obligations, if so specifically provided therein.

Such aspects may include clauses concerning confidentiality and exclusivity of dealings, amongst others. In certain circumstances it may be construed as a letter of acceptance of the offer resulting in a concluded contract between the parties. It largely depends on the intention of the parties to be drawn from the terms of the Letter of Intent, the nature of the transaction and other relevant circumstances. If parties have acted on a Letter of Intent (as if there is a binding obligation), it is likely to be held as a binding contract between them. In India, a binding contract can result from conduct alone.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer's liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors' all-risk insurance?

The standard type of insurance policy opted by the employer, contractor or a sub-contractor separately or jointly is the Contractor's All Risk Policy ("CAR Policy"). All major construction contract projects expressly provide for putting in place a CAR policy during the construction stage. Federal legislation requires any business including construction projects employing more than 10 people to procure registration under the Employees' State Insurance Act, 1948 ("ESI Act").

The ESI Act mandates every employer to provide for its worker's insurance. The said Act covers both workers employed directly under an employer and through a contractor. The insurance procured by an employer/contractor under the mandate of the ESI Act covers for contingencies such as maternity leave, sickness, temporary or permanent physical disablement, or death owing to the hazards of employment which may lead to loss of wages and earning capacity of an employee.

1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety?

The following are some of the statutory requirements which must be complied with:

(a) General requirements: As stated above, all construction contracts must satisfy the requirements of the Indian Contract Act, 1872 to be legally enforceable. There are no statutory requirements specifically in relation to construction contracts.

(b) Labour: All employers and contractors are required to comply with the relevant labour legislations in force in India or in the state/city concerned. The onus of complying with such labour laws falls upon an employer or a contractor depending on the legislation. Labourers get their legal recognition from the definition of the word "workman" under the Industrial Disputes Act, 1947 (a Federal legislation) which entitles them to various statutory benefits and fair treatment at the hands of their employer/contractor. Further, the Contract Labour (Regulation and Abolition) Act, 1970 must be complied with by any principal employer/contractor who hires 20 or more contract labourers for an "establishment". The said Act requires the principal employer to register its establishment in accordance with the Act, whereas all such contractors must obtain a licence from the authorised licensing authority specified in the Act. In order to regulate the condition of service of inter-state labourers, the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979, requires all contractors who employ five or more inter-state migrant workmen to register themselves. It is aimed to protect and/or provide a migrant worker's right to equal wages, displacement allowance, home journey allowance, medical facilities, etc. The Workmen's Compensation Act, 1923 require that compensation be paid to workers if injured in the course of employment. Under the Minimum Wages Act, 1948, the employer is required to pay the minimum wage rates as may be fixed by the relevant government. Further, the Payment of Wages Act, 1936 ensures that the employees receive wages on time and without any unauthorised deductions.

(c) Tax: A person responsible for paying any sum to a contractor for carrying out any work (including supply of labour for carrying out any work) is required to, at the time of payment, deduct tax commonly known as Tax Deducted at Source ("TDS") under Section 194C of the Income Tax Act. The Works Contract Tax is applicable to contracts for labour, work or service. Other taxes include VAT and Service Tax. The Building and Other Construction Workers Welfare Cess Act, 1996 which applies to 10 or more building workers or other construction work, has been enacted for the welfare of construction workers including regulating the workers safety, health, and other service conditions. A cess of 1% is collected from the employer on the cost of construction incurred.

(d) Health and Safety: Social security legislations such as the Employee's Compensation Act, 2009, Employees' State Insurance Act, 1948, Maternity Benefit Act, 1961, Payment of Gratuity Act, 1972, and the Employees' Provident Fund Act, 1952 mandatorily apply to all employers and contractors hiring labourers or workmen in the construction industry.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete?

Yes. In construction contracts, provision for retaining part of the purchase price for the given situations is fairly common. Parties may also agree to deposit the purchase price in an escrow account to ensure a level-playing field for both the employer and the contractor. The contract may provide that the employer, prior to completion of the works, releases the retention money provided the contractor furnishes an unconditional bank guarantee equivalent to the retention money.

1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees?

Yes, performance bonds/performance guarantees are commonly provided for in construction contracts in India to provide security against failure of a contractor to perform its contractual obligations. Similarly, an employer may require company guarantees from parent companies against the duties and obligations of a subsidiary company involved in a construction contract.

The nature of restrictions that may apply to a performance guarantee will depend upon the wording of the terms of guarantee. A performance guarantee, in nature, is a contract between an employer and a guarantor, independent of the contract between an employer and a contractor. Therefore, unless otherwise provided, a guarantor shall be obliged to unconditionally honour a guarantee as and when called upon by the employer.

Normally, construction contracts require the contractor to furnish an unconditional performance bank guarantee to ensure timely and satisfactory performance by the contractor. The employer normally requires the contractor to keep the performance bank guarantee valid until the defect liability period is over or the completion certificate is issued. The beneficiary of the bank guarantee, i.e. the employer, must make a demand for payment under the bank guarantee, should a need so arise, before the expiry of validity period stipulated in the bank guarantee. A demand made by the employer for payment after the validity period will not be honoured by the bank.

1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site?

Yes it is possible. Right to lien over goods arises from the contractor's right to be duly paid for the goods supplied to an employer. The existence of right of lien over goods, and the scope of such right, is determined by a contractual clause to that effect. Lien over goods whose ownership passes over to an employer on delivery to, or affixation on, a construction site may exist if contractually so provided for. However, most construction contracts do not provide for the contractor's title rights to the goods and supplies made for the works.

Download - Construction & Engineering Law

Originally published in Global Legal Group

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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